Vulnerability and Policy Response: Unintended Consequences DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Will Georgic, B.A., M.S. Graduate Program in Agricultural, Environmental and Development Economics The Ohio State University 2019 Dissertation Committee H. Allen Klaiber, Advisor Sathya Gopalakrishnan Tim Haab 1 Copyrighted by Will Cameron Georgic 2019 2 Abstract There are three general methods for enhancing flood risk resiliency and reducing expected damages: insurance, protection, and retreat. In the United States, the policy portfolio associated with each approach can stand substantial improvement and examples of shortcomings are numerous. In this dissertation, I use models of land use and spatial equilibrium to inform methods of causal inference in order to analyze observed responses to policies aimed at reducing vulnerability. I then offer insights which could help guide improved policies moving forward. Chapters 2 through 4 of this dissertation address economic behavior in response to a unique policy or approach associated with either insurance, protection, or retreat. Chapter 2: In 2017, the National Flood Insurance Program exceeded its borrowing capacity. While half the debt was forgiven, more will be accrued due in large part to premium subsidies for older, vulnerable properties. Efforts to phase out subsidies are slow, with policymakers and constituents concerned over the impacts of subsidy removal on housing markets. Using an exogenous break in subsidy eligibility specified in the original legislation, I estimate nationwide and metro region specific difference-in- differences models to identify the capitalization of subsidy eligibility in home values. Given the well-known finding that flood insurance uptake is imperfect in 100-year ii floodplains and in accordance with the predictions of a hedonic model with asymmetric information, I find a rate of capitalization within the bounds of outcomes resulting from fully informed market participants and from buyers and sellers with heterogeneous awareness, averaging approximately $12,000 per eligible residence. I further find that during a temporary removal of subsidies in 2012-2014, the capitalization of subsidies diminished, providing additional evidence of my causal mechanism, and supporting the most recent, pertinent legislation, The Homeowners Insurance Affordability Act of 2014. Chapter 3: “The Levee Effect” is the phenomenon by which efforts to reduce expected damages from flooding through the construction of physical capital may actually increase expected damages through induced development. Though this effect was first hypothesized in 1945, it has not been rigorously empirically tested. In this chapter, I consider the development patterns in southeastern and central Florida following the Flood Control Act of 1948 to estimate the impact of discrete levee construction on rates of housing development using a fixed effect Poisson regression and a nonlinear difference- in-differences identification strategy. I find that newly constructed levees increased the rate of residential development by over 50 percent when compared to what would have occurred in these areas had the levees never have been built. Extending my analysis to the 21st century, I use a duration model to characterize the optimal stopping decision inherent to land conversion and a control function to account for price endogeneity, and I find that the protection provided by levees creates a lasting effect on residential development patterns. While this analysis only represents the first stage in empirically iii testing “The Levee Effect”, it provides evidence that newly constructed levees significantly increase housing construction without proper regulatory restrictions, potentially increasing (rather than decreasing) expected damages from flooding. Chapter 4: Floodplain buyout programs across the country are plagued by low levels of adoption. While federal funds are available to support locally targeted efforts at reducing vulnerability, proposals must pass a cost-benefit analysis with limited scope for externalities. In this chapter, I show that accounting for spillovers from vulnerable property acquisitions significantly changes the cost-benefit calculation, potentially permitting more generous offers to be made. Using a novel and exhaustive dataset for housing transactions in Harris County, Texas, I find that a 200 meter reduction in the distance to the nearest buyout is associated with a $365 increase in the price of the average home, similar to the finding of $320 from the most similar study. However, this average effect masks important heterogeneity, suggesting that positive effects are likely in higher quality neighborhoods while negative effects are likely in lower quality neighborhoods. These results are robust to measurement and identification strategy variation and indicate that while more generous buyout offers may be permissible in higher quality neighborhoods, there may be unintentional inequities in how acquired land is processed across neighborhoods. iv Dedication To my parents, who have each sacrificed on a daily basis so that their sons could be truly and positively free v Acknowledgments “You have done such good to me I would do the same to you” – Walt Whitman I have so enjoyed my graduate education that I cannot possibly fully express my gratitude in a few short paragraphs; still I will try. I owe my deepest thanks to my home department and the Graduate Studies Committee for providing every opportunity for me to succeed. Ultimately, any success that comes my way is a testament to my advisor, Allen Klaiber, whose patient guidance has continually made me a better economist. I have received similar professional and academic mentorship from my committee members Sathya Gopalakrishnan and Tim Haab. I do not take these relationships for granted and I consider myself fortunate to have studied under such exemplary scholars. I will always be grateful for the lifelong friends that I have made while at Ohio State. My officemates David Wolf, Tim Jaquet, Xiao Dong, and Xiaoyu Li improved both the quality of my research and the quality of my life over the past several years. In addition to Dr. Wolf, I would like to thank Julio Acuna, Bo Feng, and Mark Rembert for their support, insight, and camaraderie in the early years of my education. We will forever be bound by our shared experiences and our common values. vi I would not have found my calling in studying environmental economics without the advice and assistance of my undergraduate advisor, Ted Burczak, as well as Denison University economics professors Fadhel Kaboub and Jessica Bean. Professors Xiao Jiang, Andrea Ziegert, and Katherine Snipes have also helped me realize my professional goals, and for that I am sincerely thankful. Finally, I would be remiss if I did not thank my father-in-law, Dr. Steven Joyce, for so aptly demonstrating the daily fulfillment that accompanies a pursuit of the life of the mind. The path to the completion of this degree has been long, and perhaps most treacherous before it even formally began. No one can attest to that more than my wife, and partner of nearly ten years, Genevieve. It is to her that I owe my greatest thanks for her undying support and faith in my potential. The flukes are at peace. vii Vita 2007.........................................................................................Buckeye Valley High School 2011.................... B.A. Philosophy, Political Science, and Economics, Denison University 2015....................................................... M.S. AED Economics, The Ohio State University Fields of Study Major Field: Agricultural, Environmental and Development Economics viii Table of Contents Abstract ............................................................................................................................... ii Dedication ........................................................................................................................... v Acknowledgments.............................................................................................................. vi Vita ................................................................................................................................... viii List of Tables ..................................................................................................................... xi List of Figures ................................................................................................................... xii Chapter 1: Introduction ....................................................................................................... 1 Chapter 2: Do NFIP Subsidies Matter to Homebuyers? Evidence from Nationwide Housing Sales...................................................................................................................... 4 2.1 The NFIP Experiment ............................................................................................... 9 2.2 Capitalization with Potential Information Asymmetry ........................................... 13 2.3 Identification Strategy ............................................................................................. 18 2.3.1 Hedonic Model of Subsidy Capitalization ....................................................... 18 2.3.2 Difference-in-Differences Identification ........................................................